RUSSIA AND CIS OIL AND GAS QUARTERLY REVIEW February 2023
B1 Moscow Energy Center
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In this issue:
The Global Composite PMI posted 48.2 in December, up a few ticks from November’s 29-month low of 48.0, but remaining below the 50-point threshold. India and Ireland were the only nations to register growth in economic activity, while the US, China, the euro area, the UK, Brazil, Russia and Australia all saw an economic downturn.
The World Bank claims that a number of factors, such as elevated inflation, higher interest rates, reduced investment and supply chain disruptions, continue to weigh heavily on the global economy and it has therefore trimmed its global GDP growth forecast from 3% to 1.7% in 2023 and 2.7% in 2024.
Brent crude surged 40% from a year earlier to an average of $99 per barrel in 2022, while Russia’s two main export blends – Urals and ESPO – were trading at $80 and $91 per barrel, respectively (up only 16% and 26%), with their discount to the international benchmark growing amid geopolitical pressure. In January 2023, the discount was 33% for Urals and 6% for ESPO, with a barrel of Brent costing an average of $84.
Analysts’ median forecast for Brent is $89/bbl in 2023 and $87/bbl in 2024, which may be changed depending on the pace of China’s reopening and demand recovery.
Battered by geopolitical storms in 2022, well-established market mechanisms started to gradually give way to intergovernmental regulation. The year’s end was marked by the coming into force of EU restrictions on seaborne imports of Russian crude as well as the $60 price cap agreed earlier by the G7 economies (the US, the UK, Germany, France, Canada, Italy and Japan), the European Union and Australia. The common measure will kick in on 5 February 2023. The coalition plans to set two caps, $100 per barrel on products trading at a premium to crude, such as diesel, and $45 per barrel on products trading at a discount to crude, such as fuel oil.
Russia produced 535 million tonnes of liquid hydrocarbons (10.74 million b/d converted at a rate of 7.33 barrels per tonne), up 2% YoY despite unprecedented pressure, while its crude exports in 2022 rose 7% from a year earlier.
Based on preliminary estimates, primary processing in 2022 declined 3.2% YoY to 272 million tonnes, while gasoline and diesel output rose 4.4% and 6.0%, respectively, and fuel oil output dropped 6.9% from the previous year.
Russia is ramping up supplies to alternative markets, such as Turkey, with diesel supplies there growing from 3.99 million tonnes in 2021 to 5.05 million tonnes in 2022, and Singapore, which took in more than double the previous year’s volume of Russian naphtha and fuel oil in December 2022 with a view to re-exporting them to other parts of the globe.
In the current circumstances, the following scenarios are possible: (i) China and India will boost oil imports from Russia while developing their own refining infrastructure with a view to covering Europe’s demand for diesel fuel, (ii) Russia will send its products to Europe via alternative ports, such as Singapore, (iii) importers will buy Russian oil products to meet their domestic needs and will sell their own refining output elsewhere at a real market price.
In early 2023, world gas prices were 23%-28% lower than last year and 60%-70% below the August peak (depending on the region). Comparing Europe and Asia, the former was the premium market throughout all of last year, as China’s zero-COVID policy, combined with sensitivity to high LNG prices in some countries, kept a lid on prices in Asia. However, in January 2023 Asia regained its status as an attractive destination for suppliers, with the average gap between prices in Europe and Asia widening to $2 per million BTU for the first time since February 2022.
Russia’s natural gas output in 2022 dropped 11.2% YoY to 695.4 billion cubic meters.
Unlike pipeline gas, combined LNG supplies to the UK and the EU grew 19% from a year earlier as Belgium, France and Spain increased their imports, while other EU members brought them down. Exports to Asia dropped 3% YoY, although the falling trade volumes with South Korea and India were partly offset by growing supplies to China and Singapore.